AAA REINSURANCE LIMITED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015

Transcription

1 FINANCIAL STATEMENTS (AND INDEPENDENT AUDITORS REPORT THEREON) FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015

2 FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 AND 2015 CONTENTS Independent Auditors Report Statements of Financial Position... 3 Statements of Comprehensive Income... 4 Statements of Changes in Shareholder s Equity 5 Statements of Cash Flows. 6 Notes to the Financial Statements

3 INDEPENDENT AUDITORS' REPORT The Shareholder, AAA Reinsurance Limited We have audited the accompanying financial statements of AAA Reinsurance Limited (the Company ), which comprise the statements of financial position as of December 31, 2016 and 2015, and the related statements of comprehensive income, changes in shareholder s equity and cash flows for the years then ended, and the related notes to the financial statements. Management s responsibility for the financial statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Company s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of AAA Reinsurance Limited as of December 31, 2016 and 2015, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. Chartered Professional Accountants Hamilton, Bermuda June 30, 2017 Victoria Hall, 7 th Floor, 11 Victoria Street, Hamilton HM11, Bermuda P.O. Box HM 1614, Hamilton, HM GX, Bermuda Tel: Fax: info@mazars.bm 2

4 STATEMENTS OF FINANCIAL POSITION AS AT DECEMBER 31, 2016 AND 2015 (Expressed in United States Dollars) December 31 December Note $ $ ASSETS: Cash and cash equivalents 3 258,423, ,743,715 Reinsurance balances receivable 117,474, ,160,624 Prepaid reinsurance premiums 6 73,181, ,461,299 Outstanding losses recoverable from reinsurers 6, 7 116,394, ,971,513 Other assets , ,810 Prepaid expenses 32,718 33,027 Due from related parties, principally parent 10 23,089 12,876 Total assets 565,706, ,559,864 LIABILITIES AND SHAREHOLDER'S EQUITY: LIABILITIES: Outstanding losses and loss expenses 7 130,907, ,341,485 Unearned premiums 90,613, ,439,685 Reinsurance balances payable 85,330, ,267,928 Accounts payable and accrued expenses 174, ,306 Due to related parties, principally parent ,000 - Total liabilities 307,126, ,195,404 SHAREHOLDER'S EQUITY: Authorised, issued and fully paid 120,000 common shares of $1 par value each 8 120, ,000 Contributed surplus 9 10,000,000 10,000,000 Retained earnings 248,459, ,244,460 Total shareholder's equity 258,579, ,364,460 Total liabilities and shareholder's equity 565,706, ,559,864 The accompanying notes should be read in conjunction with these financial statements Approved by the Board of Directors: Director Director 3

5 STATEMENTS OF COMPREHENSIVE INCOME December 31 December 31 Note $ $ UNDERWRITING INCOME: Gross premiums assumed 204,508, ,250,003 Change in unearned premiums 58,825,719 73,957,010 Premiums assumed earned 263,334, ,207,013 Reinsurance ceded 152,729, ,904,773 Change in prepaid reinsurance premiums 44,279,934 59,594,776 Premiums ceded earned 197,009, ,499,549 Net premiums earned 66,324, ,707,464 UNDERWRITING EXPENSES: Losses and loss expenses incurred (46,178,435) (32,600,475) Reinsurance recoveries 47,415,729 38,690,697 Net losses and loss expenses incurred 7 1,237,294 6,090,222 Profit commission on reinsurance 24,991,407 31,253,627 Net underwriting income 90,078, ,870,869 Rental income 10 10,214 12,827 Investment income, net 4 969, ,580 General and administative expenses (1,843,243) (1,906,208) Total other income and expenses (863,952) (1,514,801) Net income from continuing operations 89,214, ,356,068 Loss from discontinued operations 15 - (10,867) Net income 89,214, ,345,201 COMPREHENSIVE INCOME 89,214, ,345,201 The accompanying notes should be read in conjunction with these financial statements 4

6 STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY (Expressed in United States Dollars) Note Share capital Contributed surplus Retained earnings Total $ $ $ $ Shareholder's equity - December 31, ,000 10,000, ,899, ,019,259 Comprehensive income ,345, ,345,201 Dividends (120,000,000) (120,000,000) Shareholder's equity - December 31, ,000 10,000, ,244, ,364,460 Comprehensive income ,214,799 89,214,799 Dividends (20,000,000) (20,000,000) Shareholder's equity - December 31, ,000 10,000, ,459, ,579,259 The accompanying notes should be read in conjunction with these financial statements 5

7 STATEMENTS OF CASH FLOWS December 31 December $ $ Operating activities: Net income 89,214, ,345,201 Net changes in non-cash balances relating to operations : Reinsurance balances receivable 36,685,776 79,219,305 Prepaid reinsurance premiums 44,279,934 59,594,776 Outstanding losses recoverable from reinsurers 170,577, ,136,040 Assets and liabilities relating to discontinued operations, net - 10,057,177 Prepaid expenses 309 (1,533) Outstanding losses and loss expenses (185,433,776) (208,079,962) Unearned premiums (58,825,719) (73,957,010) Reinsurance balances payable (16,937,113) (65,602,037) Accounts payable and accrued expenses 28, Cash and cash equivalents provided by operating activities: 79,589, ,712,360 Financing activities: Due to/from related parties, principally parent 89,787 - Dividends paid (20,000,000) (120,000,000) Cash and cash equivalents applied to financing activities (19,910,213) (120,000,000) Net increase in cash and cash equivalents 59,679,309 24,712,360 Cash and cash equivalents at beginning of year 198,743, ,031,355 Cash and cash equivalents at end of year 258,423, ,743,715 The accompanying notes should be read in conjunction with these financial statements 6

8 1. General AAA Reinsurance Limited (the "Company") was incorporated under the laws of Bermuda on April 1, 1999 and is licensed as a Class 3a reinsurer (Effective January 1, 2009) under the Insurance Act 1978 of Bermuda and related regulations to write all classes of property and casualty business. The Company is a wholly owned subsidiary of AAA International Ltd., a Bermuda registered holding company. The Company provides reinsurance of property and casualty risks associated with the oil operations of both Sociedade Nacional de Combustiveis de Angola ( Sonangol ) which is based in Angola and is owned 100% by the State of Angola and various Angolan joint ventures between Sonangol and major global energy companies. All assumed business is written through AAA Seguros SARL ( AAA Seguros ), a company related through common control which is the lead insurer on all assumed business with unrelated coinsurers participating on the same risks. The Company retains a per occurrence net retention of up to $5 million on the majority of its property and casualty risks underwritten and has entered into horizontal aggregate excess of loss reinsurance arrangements to protect its aggregate exposures. The Company also provides direct insurance cover for the errors and omissions risks of AAA Risk Solutions Limited, a group company with contract limits of $1 million per occurrence and in the aggregate. In addition, as discussed more fully in Note 15, the results of operations of the Company s former wholly owned subsidiary, Global Life Ltd., for the prior year have been classified as discontinued operations. Global Life Ltd. was dissolved on March 10, 2015 and the remaining assets were transferred to the Company. During 2016, AAA Seguros position as leader and reinsurance purchaser for all oil and gas business in Angola was revoked. As such this Company s position was affected as there was no new business to negotiate. Effective November 10, 2016, the Company was determined to be in run-off and can no longer effect any contracts of insurance or reinsurance under its current license. The Company has evaluated known recognized and non-recognized subsequent events through June 30, 2017, the date the financial statements were available to be issued. 2. Summary of significant accounting policies The accompanying financial statements are prepared in accordance with accounting principles generally accepted in the United States of America which apply the following significant accounting policies adopted by the Company: Use of estimates To prepare the financial statements, the Company has to make estimates and assumptions that affect the book value of assets and liabilities, income and expenses, and data disclosed in the notes to the financial statements. All estimates are subjective in nature and could materially influence the financial statements. Accordingly, management makes these estimates and assessments on an ongoing basis according to past experience and various factors that are deemed reasonable and which constitute the basis for these assessments. The amounts shown in the Company s future financial statements are likely to differ from these estimates in accordance with changes in assumptions or different conditions. 7

9 2. Summary of significant accounting policies (continued) Use of estimates (continued) The principal significant estimates made by the Company s management primarily affect the provision for outstanding losses and loss expenses and the related reinsurance balances recoverable, and unearned premiums. Discontinued operations As discussed more fully in Note 15, the results of operations of the Company s former wholly owned subsidiary, Global Life Ltd., for the prior year have been classified as discontinued operations. The results of operations and assets and liabilities of Global Life Ltd. have therefore been presented separately on the face of the financial statements as part of discontinued operations. Global Life Ltd. was dissolved on March 10, 2015 and the remaining assets were transferred to the Company. Revenue recognition and related acquisition costs Premiums assumed and ceded are recorded on the accruals basis net of brokerage and are included in income on a pro-rated basis over the lives of the treaties with the unearned portion deferred in the balance sheet. Premium estimates on certain policies are made using the latest information available to management. Adjustments to estimates are recorded in the period in which they are determined and could be material to the financial statements. Acquisition costs, mainly commissions and taxes, related to unearned premiums are deferred and amortized to income over the periods in which the premiums are earned. The method followed in determining the deferred acquisition expenses limits the amount of the deferral to its realizable value by giving consideration to losses and expenses expected to be incurred as premiums are earned. Interest income is accrued to the statement of financial position date. Rental income from the rental of artwork to a related party is accrued to the statement of financial position date. Outstanding losses and loss expenses Losses and loss expenses and life claims paid are recorded when advised by the ceding insurance companies. Outstanding losses comprise estimates of the amount of reported losses and loss expenses plus a provision for losses incurred but not reported, based on the recommendations of the Company's independent actuary using a combination of historical data (where available) and industry data. The Company does not discount its provision for losses and loss expenses or its liabilities for unpaid claims. Amounts recoverable from reinsurers and reinsurer profit commissions are estimated in a manner consistent with the underlying liabilities and are recorded on the accruals basis under the terms of the underlying agreements. 8

10 2. Summary of significant accounting policies (continued) Outstanding losses and loss expenses (continued) Management believes, based on the recommendations of independent actuaries, that the provision for outstanding losses and loss expenses and the estimate of unpaid life claims at the balance sheet will be adequate to cover the ultimate net cost of losses incurred to the balance sheet date but the provision is necessarily an estimate and may ultimately be settled for a significantly greater or lesser amount. In addition, the Company has limited past loss experience (due to its short operating history) which increases the inherent uncertainty in estimating ultimate losses and the annual provision for outstanding losses and loss expenses. It is at least reasonably possible that management will revise this estimate significantly in the near term. Any subsequent differences arising are recorded in the period in which they are determined. Functional currency and foreign exchange on internal transactions The Company s functional currency is the U.S. dollar. Monetary assets and liabilities denominated in foreign currencies are translated into U.S. dollars at the rates prevailing at the balance sheet date. Revenues and expenses are translated at the rate of exchange prevailing as at the date of the transactions. Gains and losses arising from translation are included in the determination of comprehensive income for the year. Cash and cash equivalents Cash and cash equivalents include cash held in banks, money market funds and other short-term deposits having maturities within three months of the date of purchase. Share capital Common shares are classified as equity. Incremental costs directly attributable to the issue of common shares are recognised as a deduction from equity, net of any tax effects. New Accounting Standards Adopted During the Year During June 2015, the FASB issued ASU , Technical corrections and improvements. The amendments affect a wide range of topics in the Codification and are effective for fiscal years, beginning after December 31, The adoption of these amendments did not have a material effect on the Company s financial statements. New Accounting Standards to be Adopted In May 2015, the FASB issued ASU , Financial Services Insurance (Topic 944): Disclosure about Short - Duration Contracts. The amendments require insurance entities to disclose for annual reporting periods specified information about the liability for unpaid claims and claim adjustment expenses. Additionally, the amendments require insurance entities to disclose for annual and interim reporting periods a roll forward of the liability for unpaid claims and claim adjustment expenses, described in Topic 944. For nonpublic entities, the amendments are effective for annual periods beginning after December 15,

11 2. Summary of significant accounting policies (continued) New Accounting Standards to be Adopted (continued) In January 2016, the FASB issued ASU , Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in this update address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. For nonpublic entities, the amendments are effective for annual periods beginning after December 15, Management does not believe the adoption of these amendments will have a material effect on the Company s financial statements. The Company has determined that all other recently issued accounting pronouncements do not apply to its operations. 3. Concentration of credit risk As of December 31, 2016, cash and cash equivalent balances of $258,423,024 (2015- $198,743,715) are held with three ( two) banks, in Bermuda, Singapore and Switzerland. 4. Investments During the year ended December 31, 2016, net investment income of $969,077 ( $378,580) comprised of dividend and interest income of $969,077 ( $378,580). 5. Dividends declared On April 26, 2016 a dividend of $20,000,000 was declared and paid. On March 5, 2015 and November 12, 2015 dividends of $70,000,000 and $50,000,000, respectively were declared and paid during the prior year. 6. Reinsurance Reinsurance contracts do not relieve the Company from its obligations to policyholders. Failure of reinsurers to honor their obligations could result in losses to the Company; consequently, allowances are established for amounts deemed uncollectible. The Company evaluates the financial condition of its reinsurers and monitors concentrations of credit risk arising from similar geographic regions, activities, or economic characteristics of the reinsurers to minimize its exposure to significant losses from reinsurer insolvencies. At December 31, 2016, losses recoverable from reinsurers (inclusive of IBNR) amounted to $116,394,345 ( $286,971,513). One reinsurer (rated AA+ by Standard and Poor s) accounts for 29.90% of the total balance of outstanding losses recoverable (exclusive of IBNR) from reinsurers ( ,.38%). 100% ( %) of reinsurers have A.M. Best or Standard and Poor s ratings of A- or higher. At December 31, 2016, prepaid reinsurance premiums of $14,442,820 ( $23,137,916) were associated with one reinsurer ( one) which has a Standard and Poor s ratings of A (2015 AA). 10

12 7. Outstanding losses and loss expenses The liability for outstanding losses and loss expenses comprises: $ $ Outstanding losses 39,836, ,910,741 Losses incurred but not reported 91,070, ,430, ,907, ,341,485 The summary of changes in outstanding losses and loss expenses and unpaid life claims for years ended December 31, 2016 and 2015 are as follows: $ $ Gross balance at beginning of year 316,341, ,421,447 Less: reinsurance recoverable (286,971,513) (494,107,553) Net balance at beginning of year 29,369,972 30,313,894 Incurred losses related to: Current year 6,232,821 11,444,761 Prior years (4,995,527) (5,354,539) Total incurred 1,237,294 6,090,222 Paid losses related to: Current year 6,712 - Prior years 16,087,190 7,034,144 Total paid 16,093,902 7,034,144 Net balance at end of year 14,513,364 29,369,972 Plus: reinsurance recoverable 116,394, ,971,513 Gross balance at end of year 130,907, ,341,485 The changes in the prior years provision for claims and claims adjustment expenses was primarily due to the ongoing analysis of loss development trends across all accident years and not attributable to any specific occurrence or event. 11

13 7. Outstanding losses and loss expenses (continued) The establishment of the provision for outstanding losses and loss expenses is based on known facts and interpretation of circumstances and is therefore a complex and dynamic process influenced by a large variety of factors. The Company has limited past loss experience with similar cases and historical trends involving claim payment patterns, pending levels of unpaid claims, product mix or concentration, claim severity and frequency patterns such as those caused by natural disasters, fires or accidents, depending on the business assumed. It is at least reasonably possible that management will change its estimate of ultimate losses significantly in the near term. 8. Share capital The Company has authorized, issued and fully paid share capital of 120,000 common shares with a par value of $1.00 each. 9. Contributed surplus Contributed surplus represents cash contributed by the shareholder in excess of the issued share capital and retained earnings capitalized. 10. Related party transactions Amounts due from related parties are unsecured, non-interest bearing and have no fixed repayment terms. The breakdown is as follows: $ $ AAA International Limited (12,876) (12,876) AAA Insurance & Reinsurance Brokers Limited (10,213) - (23,089) (12,876) Amounts due to elated parties are unsecured, non-interest bearing and have no fixed repayment terms. The breakdown is as follows: $ $ AAA International Limited 100, ,000 - Other assets consist of artwork which is rented to AAA Insurance and Reinsurance Brokers Ltd, a company under common control. Income of $10,214 ( $12,827) is included within rental income. 12

14 11. Statutory requirements As a registered insurance company under the Bermuda Insurance Act 1978 amendments thereto and related regulations ( the Act ) the Company is required to prepare Statutory Financial Statements and to file a Statutory Financial Return annually (or as otherwise agreed, in certain circumstances). The Act also requires the Company to meet certain defined measures of solvency and liquidity. The statutory capital and surplus amounted to $258,546,541 and $189,331,433 as of December 31, 2016 and 2015, respectively. The principal difference between the Company s statutory capital and surplus and shareholders equity as reported in conformity with generally accepted accounting principles relates to the inadmissibility of prepaid expenses. Actual statutory capital and surplus at December 31, 2016, as determined using statutory accounting principles, is as follows: $ Total shareholder s equity 258,579,259 Less non-admitted assets: Prepayments (32,718) Statutory capital and surplus 258,546,541 Actual statutory capital and surplus at December 31, 2015, as determined using statutory accounting principles, is as follows: $ Total shareholder s equity 189,364,460 Less non-admitted assets: Prepayments (33,027) Statutory capital and surplus 189,331, Pension Costs The company operates a defined contribution pension scheme. Costs incurred during 2016 were $4,747 ( $4,690). 13. Taxation Under current Bermuda law the Company is not required to pay any taxes in Bermuda on either income or capital gains. The Company has received an undertaking from the Minister of Finance in Bermuda that in the event of any such taxes being imposed the Company will be exempted from taxation until the year

15 14. Fair value of financial instruments The following methods and assumptions were used by the Company in estimating fair value disclosures for financial instruments: Cash and cash equivalents: The carrying amounts reported in the balance sheet for these instruments approximate their fair values. Other assets and liabilities: The fair value of reinsurance balances receivable, reinsurance balances payable, accounts payable and accrued expenses, due to related parties, and dividends payable approximates their carrying value due to their relative short term nature. The estimates of fair values presented herein are subjective in nature and are not necessarily indicative of the amounts that the Company would actually realize in a current market exchange. However, any differences would not be expected to be material. Certain instruments such as property, plant and equipment, outstanding losses recoverable from reinsurers, outstanding losses and loss expenses, prepaid reinsurance premiums, unearned premiums, prepaid expenses, other assets and unpaid life claims are excluded from fair value disclosure. Thus the total fair value amounts cannot be aggregated to determine underlying economic value of the Company. 15. Discontinued operations The Company through its former wholly owned subsidiary Global Life Ltd. provided Group Life reinsurance whereby it reinsured, in excess of $5,000 per life, Group Life Risks assumed by AAA Seguros SARL. AAA Seguros SARL is a company related through common control and is a life and non-life insurance company registered and licensed in Angola. Having written no new business in 2012, the decision was made in February 2013 to liquidate Global Life Ltd. An agreement was finalized during 2013 that cancelled the existing reinsurance agreement and commuted all remaining insurance liabilities of Global Life Ltd. Global Life Ltd. was dissolved on March 10, 2015 and the remaining assets were transferred to the Company. On dissolution the final surplus of Global Life Ltd was $46,310. The resulting loss of $10,867 for this period was recorded in the statement of comprehensive income during the year-ended December 31,